taxes, Gross vs Net taxes, shortfalls in collection

1. Prologue2. Why Budget?1. #1: Contingency fund of India (Art.267)2. #2: Public Accounts of India (Art.266)3. #3: Consolidated fund of India (Art.266)4. Then what is Vote on Account?5. Ok then whats interim budget?6. Vote on Account vs Interim budget7. Interim budgets in the past3. Parts of Budget4. #1: Direct Taxes1. Direct taxes under Interim Budget 20142. Income Tax3. Shortfall in Direct tax collection = #EPICFAIL4. But Why shortfall in Direct tax collection?5. #2: Indirect taxes1. Indirect Taxes in Interim Budget 20141. #I1: Service Tax2. #I2: Excise Duty: Automobiles3. #I3: Excise: Mobile handsets4. #I4: Custom Duty: soap industry5. #I5: Custom Duty: Bank note Mill6. #I6: Counter Veiling Duty (CVD): Road machines2. Indirect Tax collection = #EPICFAIL shortfall3. Why shortfall in indirect tax collection?6. MCQ Data for Tax collection: Ascending descending1. Table1: Direct vs indirect2. Table2: Ranking Among all taxes (2013-14)3. Table3: Ranking Among all taxes (2014-15)4. Table3: Tax collection highest to Lowest7. Gross vs net Tax revenue8. Appendix1. #1: Direct taxes can be levied on Expenditure also2. #2: Canons of taxation: why some taxes get abolished?PrologueTotal four parts in this [Budget] Article series.Part 1: Interim Budget => Revenue Part=> Tax revenue (Direct vs indirect taxes):provisions and issues related to them.Part 2: Interim Budget => Revenue Part=> Non-tax revenue: sources, issues. [+ Capitalpart]Part 3: Interim Budget => Plan and non-plan Expenditure, subsides and deficits.Part 4: remaining filler points: funds, schemes, policies mentioned in Chindus budgetspeech.Why Budget?typical sight of a middleclass household:Daddy earns monthly salary, stores some of it in the bank, gives the rest to mommy. Afterwards,whenever daddy needs money, he has two options1. Take out from bank account, without informing mommy. No questions asked. (Unlessmommy checks the passbook/bank statement!)2. Ask mommy to give the ca$h from bedroom cupboard. In this case 11/10 times hell haveto Explain to mommy why he needs money.Same is the case governments money. Government stores its money in three places:#1: Contingency fund of India (Art.267)Held by the President of India. (doesnt mean Pranab carries the chequebook. This isoperated by finance Secretary).President can spend ca$h from this fund- for emergency/unforeseen circumstancesWithout the authorization of parliament. (mommys permission not needed)#2: Public Accounts of India (Art.266)This is made up of:1. bank savings account of the departments/ministries (for day to day transactions)2. National Investment fund (money earned from disinvestment, goes here)3. National Calamity & contingency fund (NCCF) (for disaster Management)4. National small savings fund, defense fund.5. Prarambhik Shiksha Kosh, MNREGA fund6. Provident fund, Postal insurance etc.7. and so onDoes government need parliaments permission to spend money from here? Nope.#3: Consolidated fund of India (Art.266)This fund/basket is filled by1. all the cash from direct and indirect taxes2. all the loans taken by government of India3. Whenever someone returns principle/interest of the loans given by Government of India.This is the largest of all three funds. And government needs parliaments approval to spendmoney from this fund. Why? Because Article 266 say so.Overall, finance minister must put three files on the table of parliament:1. Appropriation bill: to get permission of parliament, to take out cash from Consolidatedfund of India. Art 266.2. Finance Bill: to get permission of parliament to collect taxes from Juntaa. Art 265.3. Annual financial statement: to show the parliament data about his incoming andoutgoing money. Art 1124. (+ Although not required by the Constitution) make a budget speech to tell the world, Imtotally awesome and my government is also totally awesome.5. (+ Although not required by the Constitution) present an Economic survey, and order theUPSC aspirant, religiously mug up this data.Then what is Vote on Account?In an ordinary year,February: Chindu put these files in parliament, Media Walla go crazy about itFebruary to April: Parliament and its Committees will study these files, find spellinggrammar mistakes and vote on the demandsApril-end, parliament will pass:Appropriation bill=> Chindu is now legally entitled to take out money fromconsolidated fund of India and spend.Finance bill=>Chindu is now legally entitled to collect taxes from junta.Now here comes the problem:Consider budget for 2013:Feb 2013: FM presents the budget related docs (this will apply from 1st April 2013 to31st March 2014)up to 31st March 2013: Chindu is entitled to spend money from consolidated fund ofIndia (because previous years appropriation Act (2012-13) is valid upto 31st March2013)But Parliament discussion still on going. Appropriation bill for 2013-14, is yet to bepassed.so where to arrange money in the meantime?- for staff salary, lightbill, phone billeverything?Fund Can FM arrange money from here until budget is passed?No. this is meant for emergency situation only.ContingencyFund of IndiaThis fund barely has 500 crore rupees=not even sufficient to themonthly salary and lightbill of army-navy-airforce!Publicaccounts ofIndiaNo. Because its components have specific function. e.g. the cash fromNational Calamity & contingency fund (NCCF) is meant only fordisaster relief type work.Congresspartys Swissbank accounthell no. If Chindu withdraws money from here, to run the government =>this Robinhood-giri will defeat the whole purpose of doing scams andtaking bribes in the first place!So, ultimately, we are back to square one: the consolidated fund of India. He must arrange cashfrom here.FM(to Lok Sabha) maai baap, please allow me to spend money from consolidated fund ofIndia, until the budget is passed.^that is vote on account.Feb 2013: Chindu presents the (full) budgetMarch 2013: Chindu puts the demand under Vote on account. Under Vote on account, thegovernment usually demands 1/6th of the total (Expected) expenditure for the given year.Examplelakh croremoney sought under Vote on account 10,71,797total expenditure 58,78,455This is nearly 10 lakh cr. / 59 lakh crore = ~1/6th of the expenditure.Duration: two months. (from 1st April 2013 to 31st May 2013)Vote on account is passed by Lok Sabha (and not Rajya Sabha)because only lok sabha has the power to grant such money under Article 116(A)Ok then whats interim budget?Consider the situation in 2014Feb 2014: (if) Chindu presents (full) general budget. = its valid from 1st April 2014 to31st March 2015.April/May 2014: General election, new party comes in power. But then theyll have to livewith a budget not formed according to their manifesto/priorities= unhappiness.Although they can simply frame a new budget to replace such budget by previous party=but that means policy uncertainty = not conductive for investment and economy.for example, just before election Chindu abolishes all the excise duty (to please the votebank), then suddenly new party comes in power, and re-starts the excise duty = policyuncertainty, account keeping, saving/Expenditure habits change suddenly. harmful toeconomy.Therefore, political parties have developed an unwritten convention, Ruling party shouldNOT to initiate major changes in the tax/expenditure during General election year.Such Slim version of Budget is called interim budget.There is no legal/Constitutional obligation on the ruling party to launch an interim budgetduring election year. This is only an unwritten convention.So lets compare/contrast:Vote on Account vs Interim budgetVOTE ON ACCOUNT INTERIM BUDGETonly presents demand forExpenditure part. (i.e. allowgovernment to spend moneyfrom CFI, until budget ispassed)Deals with both income (taxation) part and Expenditure part. +annual financial statement showing incoming and outgoingmoney of the government.only one article applicable:116(2)many articles applicable112: have to put annual financial statement265: have to put finance bill (to get parliamentspermission to collect taxes)266: have to put appropriation bill (to get parliamentspermission to spend money from consolidated fund ofIndia)Only Lok Sabha hasDecision Making powerhere. Because art 116(2)specifically says House ofpeople can grant suchmoney.Both houses involved. Because Art 112: Annual financialstatement has to be laid in both houses Lok Sabha and RajyaSabha.although Rajya Sabha doesnt really have any DecisionMaking power here either, but they could stall it for 14 days.Asks parliament to grant1/6th of the total estimatedexpenditureAsks parliament to grant entire money for total estimatedexpenditure.Validity: 2 monthsIf the new Government doesnt give new (full) budget afterelection, then Interim budgets provision remain valid for thewhole financial year i.e. 1st April 2014 to 31st March 2015.done in non-election yearsand election years.only during election years/extreme situation.Vote on account doesntcontain interim budget.interim budget contains vote on account. (Because here also,budget presented in Feb, while passed somewhere in lateApril/May.) so government needs money in between. However,the vote on account will be of longer duration e.g. 3-4 months.(than during normal full budget years.)Interim budgets in the pastYashwant04 Gave quite a few schemes and tax-benefits12pagePranab09 Did not announce any new taxes or schemes.18pageChindu14No changes in direct tax.Few concessions in indirect taxFew schemes/provisions related soldier pension, education loans,skill development, Nirbhya fund etc.14pagesEnough theory, lets try a mock question from 2011s CSAT paperQ. What is the difference between interim budget and vote on account?1. The provision of a vote on account is used by a regular government, while an interimbudget is a provision used a caretaker government.2. a vote on account only deals with the expenditure in government budget, while aninterim budget includes both expenditure and receipts3. Both A and B4. Neither A nor BStatement B is correct. That eliminates option D. Now the final answer (B or C) depends onwhether A is right or not?Observe the statement AThe provision of a vote on account is used by a regular government, while an interim budgetis a provision used a caretaker government.Focus on the word Caretaker government. What do we understand by Caretakergovernment?Until new PM/CM takes charge, the earlier government continues to be in office, as incaretaker position. This happens when:Term has expired In this case how can FM present the (interim/full) budget?after PM/CM hasresignedIn this case, entire council of minister is automatically gone. So, howcan Finance minister Exist and present the (interim) budgetNo-confidencemotion passedIn this case, even if FM presents (interim) budget, itll be defeated.Parliament/assemblyis dissolved.Then where will FM place the interim budget?On 17/2/2014, Chindu presented interim budget for UPA-II. So, is UPA-II a caretakergovernment? Nope. Not yet. its term (5 years) has not expired yet. Theyve still got ~90 days tomisrule the country. Therefore statement A is wrong. Interim budget is not used by a caretakergovernment. Eliminate choices accordingly:1. The provision of a vote on account is used by a regular government, while an interimbudget is a provision used a caretaker government.2. a vote on account only deals with the expenditure in government budget, while aninterim budget includes both expenditure and receipts3. Both A and B4. Neither A nor BThus we are left with answer B.so far we learned:Why does government need to pass a budget?What is vote on account, what is interim budget and whats the difference between themtwo?Remaining topics related to polity: money bill vs finance bill, Committees of parliament,CAG , vote on grant etc. you prepare from (the great) M.Laxmikanth.Now lets start the technical/financial aspects of budget.Parts of BudgetBudget two parts.revenue part (Current) capital partwithin that, make two columns each, for incoming money (receipt) and outgoing money(Expenditure).REVENUE PART CAPITAL PARTReceipt Expenditure Receipt ExpenditureYa, but whats the need of this labour? Why cant we just have a simple income vs expense typeof thing? Well come to that in third article.For now, lets focus onBudget => Revenue partRevenue column has two sub-columns: incoming money (Receipt) vs. Outgoing Money(Expenditure).The Incoming money (Revenue receipt) can come from two sources: from tax and non-taxsources.REVENUE PART CAPITAL PARTReceipt Expenditure Receipt ExpenditureTax Non Tax1. Directtaxes2. Indirect TaxThus, weve come to the main topics of todays article= direct and indirect taxes and provisionsof interim budget 2014 (related to these taxes).#1: Direct TaxesHave two subtypesOn Income/ Expenditure on properties/assets/Capital transaction1. Income tax2. Corporate Tax (andMAT)3. Interest tax (on banks)*4. Fringe benefits tax *5. Hotel receipt Tax*1. Wealth Tax2. Securities transaction Tax (STT)3. Banking cash transaction tax*4. Estate duty*5. Gift tax*Taxes marked in (*) have been abolished long time ago. Ive mentioned them here, only incase the nostalgic UPSC professor wants to ask classification type MCQs.We should also know the direct taxes of state government.DIRECT TAXES OF UNION DIRECT TAXES STATETaxes on IncomeIncome taxCorporation Tax (and MAT)Taxes on assetsWealth TaxSTTTaxes on incomeAgriculture income taxProfessional taxTaxes on propertiesLand RevenueStamp duty/registration dutyProperty tax in urban areasNow lets check the provisions of:Direct taxes under Interim Budget 2014FM followed the Ethics(GS4) principles while making the interim budget, he did not make anychanges in the direct taxes. That means, direct tax system remains the same like Budget 2013.ObserveIncome TaxTaxable Income Income Tax2 to 5 lakh 10%5 to 10 20%>10 30%Other direct taxesCorporate tax (desi company) ~34%Corporate tax (foreign company) ~43%MAT Minimum alternative tax ~21%Wealth tax (for wealth >30 lakh rupees) 1%STT Securities Transactions tax 0.1%-0.001%**Depending on nature of securities future, option, equity etc.However, FM has done a slight tweaking in the tax deduction for corporates.until now In interim budgetif company spent money on in-house Chindu proposed to setup a neworganization called Research FundingOrganisation.This org. will fund fund research projectsResearch development = they can claim taxbenefits.selected through a competitive process.If company gives cash to thisorganization, itll be deducted fromtaxable income.Did not implement1. GAAR2. Direct tax code (DTC)3. Goods and services tax (GST)Shortfall in Direct tax collection = #EPICFAILObserveFeb 2013: FM proposes taxes for year 2013-14. Along with this, hed give estimate of taxcollection e.g. x crore from income tax, y crore from corporate tax and so on. Lets labelthis column as Budget estimate (BE) 2013.1st April 2013: new tax rates would have become effective, people start paying taxesaccordingly.May, june, july, august, September, October, November, December,.January 2014 So now FM gets new data. So, hed correct (revise) his previousestimate. We label this Revised Estimate (RE)2013.And finally for the year 2014-15 (Starting from 1/4/14 to 31/3/15, FM would again makebudget estimates for next (interim budget) so lets label it (BE)2014.Thus total weve three estimates:Direct tax BE 2013 RE 2013 BE 2014Wealth Tax 950 950 950Securities Transaction Tax 6720 5497 5992Income Tax 240919 236194 300474Corporation Tax 419520 393677 451005Total from Direct tax 668109 636318 758421Absolute numbers are not important but interpretation is. Lets try a clichd MCQ.Which of the following direct tax, fetches maximum revenue to government of IndiaA. Wealth TaxB. Securities Transaction TaxC. Income TaxD. Corporation TaxFor all three columns, you can see: Corp>>IT>>STT>>Wealth tax.Anyways, lets enter into a deeper analysis. Observe the total collection from direct Tax (inabove table).In Feb 2013, Chindu estimated ~6.68 lakh crore rupees would come from direct taxesalone! (BE2013)But he revised the data yesterday, we see barely 6.36 lakh crore have come from directtaxes (RE2013).So, whats the shortfall in direct tax collection here? 6.68-6.36= 32,000 coresBut Why shortfall in Direct tax collection?A. Because IT officials are lazy and incompetent, hence lot of people managed to evade tax?NOPE.B. Because Chindu (Harward Graduate) and his finance Secretary (IAS) are weak in maths andeconomics, hence they made wrong estimates in the first place? NOPE.Then who is the main villain behind this shortfall? Ans. (1) inflation (2) policy paralysis.Why high Inflation = Low collection of Direct taxes?1. Corporate tax= paid by Tata, Birla, Reliance, Samsung, LG, Motorola, Videocon etc.Theyll pay less tax IF their profit is DOWN. Now, High food/fuel inflation=> peoplespend less money on consumer durables mobile, TV, fridge etc.=> sales down=>profitdown=> corporate tax goes down.2. Less profit=> company cuts jobs, doesnt give salary raise to existing staff= people payless income tax.3. Less profit = less dividends to shareholders => mutual fund/sharemarket investmentdeclines= security transaction tax also goes down.4. High inflation = real interest rates are negative (recall Urjit Patel) = people invest more ingold and less in mutual funds/sharemarket etc.=> security transaction tax collection islower than expected.Why Policy paralysis = Low collection of Direct taxes?Run the same logic and youll see the connection. e.g.1. Policy paralysis=corporates cannot open new factories=> less profit=>less corporate tax.2. Since corporates cannot open new factories=> less new jobs=>less people fall in theincome tax bracket (starting from Rs.2 lakh to 5 lakh).ok enough of direct taxes. lets move on. otherwise our remaining jawaani will be spent inanalyzing the direct tax only.REVENUE PART CAPITAL PARTReceipt Expenditure Receipt ExpenditureTax Non Tax1. Direct taxes (DONE)2. Indirect Tax (now lets studythis)#2: Indirect taxesWhat are the indirect taxes of Union and States?Indirect taxes (Union) Indirect Taxes (States)i. Custom Duty (Import,Export)ii. Excise Duty (CENVATsystem)iii. Service Taxiv. Central sales tax(CST)*i. Sales Tax/ VATii. Excise duty on DESI liquor and Narcoticsiii. Motor vehicle tax, Taxes on boats and animals.iv. Toll tax (opposed by MNS/Shiv Sena)v. Electricity tax.vi. Luxury tax (on restaurant, spa etc.)vii. Taxes on Betting and gambling (on whether Modi willbecome PM or not)viii. Advertisement tax (other than TV, Radio, Newspaper)*Note: CST-Central sales tax- it belongs to Union but ca$h entirely given to States. So inbudget estimates, its collection is listed as or 00. But for MCQ purpose, know that it isthe Indirect tax of the Union.Indirect Taxes in Interim Budget 2014We saw that FM has not changed direct taxes. BUT for indirect taxes, he has made slightreductions/tweaking for certain items, to boost the economy. Lets check them one by one#I1: Service TaxThe Rate of Service tax is not changed. It is same as last year (2013-14)Service tax 12.00%2% educational cess. Meaning tax on tax = 2% of 12% +0.241% Senior & Higher Education Cess= 1% of 12% +0.12Effective service tax =12.36%Then what is new in interim budget?Following items have been exempted from service tax payment1. Rice: services related to loading, unloading, packing, storage and warehousing (Because)a. Tamilandu CM Jayalalitha has wrote letter to Mohan, demanding the same.b. putting service tax on rice related services=raises the cost of implementing Foodsecurity act.2. Cord Blood bank (they store umbilical cord for future stemcell therapy)Make no mistake: theyre exempted, but not put in negative list.Service tax negative list Exempted listGovt. cannot levy Service tax on the namesincluded in this list (total 17 items.)Theoretically, these services are taxable underservice tax, BUT for the time being, FM gavethem exemption.To modify this list, FM needs parliamentapproval (because he needs to amend theFM can modify this list by a simple notification.He doesnt need parliaments approval.Finance Act.).Examplesa. Services by the Reserve bank ofIndia;b. Betting and gambling. (because theyfall under State list.)c. Funeral, burialExamplesa. Rice loading-unloadingb. Cord blood bank#I2: Excise Duty: AutomobilesFor past few months, Automobile sector was facing slowdown because1. High inflation =people postpone purchase of high value items2. High interest rates (because to combat inflation, RBI did not reduce monetary policy ratei.e. repo rate)3. High Fuel prices.Therefore, to go a boost to automobile sector, FM has reduced the excise duty onAutomobile: SUV, Small cars, motor cycles, scooters and commercial vehicle (rickshaw,bus etc)This will be applicable only upto 30 June 2014.Result: cheaper vehicles, (hopefully) more people will buy more, and automobile sectorwill see boost in sales.#I3: Excise: Mobile handsetsTo decrease the imports of mobile phones, FM has reduced the excise duty on mobile handsetsas well. How does it help?Foreign mobile Subjected to custom duty. (But FM did not reduce it)Desi mobile Subjected to excise duty (FM reduced it)Result? Price wise: Desi mobile cheaper than Foreign mobile. = more sales. Import of foreignmobiles declined=> less CAD. (just like the gold logic.)By the way, why did not FM raise the custom duty of Foreign mobiles instead -afterall, thatdalso make desi phones cheaper!Reasons:1. US/China may drag us to WTO2. Higher custom duty doesnt decrease consumption. It only increases smuggling. (lessonlearned from gold!)So it is better to reduce excise on desi phones, than raise custom on foreign phones.#I4: Custom Duty: soap industryRationalized the import duty on non-edible oils, fatty acids, fatty alcohols.This will reduce the cost of (imported) raw material used in soap industry and oleo-chemicals industry (e.g. glycerin)Results? Soaps will become cheap. (because that was the matter of life and death!)#I5: Custom Duty: Bank note MillBank Note Paper Mill India ltd. (Bangalore)They make the special paper for producing currency notesFM allowed them to import capital good (machines) @a very low duty (5%)#I6: Counter Veiling Duty (CVD): Road machinesFirst, What is CVD and how does it affect sales?Vehicle manufactured by Subjected toDesi player Excise dutyForeign company (and imported in India) Custom dutyIt may happen that, desi vehicle is expensive because high excise duty on its input (chassis,engine, wiring, glass etc.)Result: Foreign vehicle cheaper, juntaa more attracted to buying foreign vehicle than Desi.Consequence: domestic industry gets less sales. IIP declined, job loss, industrialsickness.Possible- Solutions:1. Give subsidy to desi vehicle makers2. Reduce excise duty on desi vehicle (and its inputs)3. Increase custom duty on foreign vehicle.4. Put additional custom duty on foreign vehicle to such a level that, [taxes on foreignvehicle] become of same level like [taxes on desi vehicle].. This solution is calledcounter veiling duty (CVD).Interim budget & CVDImport of Road construction machinery will be subjected to CVD. (= itll help desimanufactures, because now foreign machines will no longer be very cheap compared to desi. Soroad contractors/companies are more likely to be buy desi items.)Indirect Tax collection = #EPICFAIL shortfallJust like Direct tax collection, here also, Chindu failed to meet targetsIndirect Tax BE 2013 RE 2013 BE 2014Excise Duties 196804 178787 199831Customs 187308 175056 201314Service Tax 180141 164927 215478Total from Indirect Tax 5.65 lakh cr. 5.19 lakh cr. 616623Observe the columns of (original) budget estimate BE2013 VS Revised estimate RE2013.Every duty collection is less than original target.What is the shortfall in the collection of indirect taxes?5.65 MINUS 5.19 =~45000 Crore rupees.Why shortfall in indirect tax collection?#1: Excise duty downIn the recent months, IIP has been going down for Consumer durablesExample of consumer durables: TVs, mobiles, cars, bikes, fans, ACs, refrigerators,ceramic tiles and carpets. (all these subjected to excise duty)High level of inflation =>people spend less on consumer durables. (because theyve tospend more on food and fuel.)#2: Custom duty downDuty on gold increased => smuggling => tax is evaded.Policy paralysis => Big projects file pending => businessman wont need to import anyraw material/ machines/construction-vehicles etc. (Even if he wants to!) therefore customduty declined.#3: Service taxInflation responsible. High level of food-fuel inflation => people spend less on luxuries hotels, spa, gym etc.In fact, government knew in advance that service tax collection would be lower than target,hence they had been running ads of Voluntary Compliance Encouragement Scheme(VCES) for service tax. From July 2013 onwards. But still, barely ~6000 crore recoveredfrom people who had been evading service tax payment so far.MCQ Data for Tax collection: Ascending descendingenough of shortfalls in tax collection, we need to worry more about MCQs than about economy.So lets update tablesTable1: Direct vs indirectTax BE 2013 RE 2013 shortfall BE 2014Direct 6.68 6.36 32k 7.58Indirect 5.65 5.19 45k 6.2Total (lakh cr.) 12.35 11.58 77k 13.78ya but Whats the wisdom here for MCQs? =that DIRECT tax brings MORE revenue togovernment that INDIRECT tax.So far, weve data for Direct taxes and indirect taxes. Now for MCQs, we need the overallranking (of which tax brings highest/lowest revenue.) Since weve revised estimates (RE 2013),so we can now ignore the ORIGINAL estimates of BE 2013.Table2: Ranking Among all taxes (2013-14)Type Taxes RE 2013direct Wealth Tax 950direct Securities Transaction Tax 5497indirect Service Tax 164927indirect Customs 175056indirect Excise 178787direct Income Tax 236194direct Corporation Tax 393677Table3: Ranking Among all taxes (2014-15)Type Taxes BE 2014direct Wealth Tax 950direct Securities Transaction Tax 5992indirect Excise 199831indirect Customs 201314indirect Service Tax 215478direct Income Tax 300474direct Corporation Tax 451005lets make one final tableTable3: Tax collection highest to LowestRank 2013 (Revised Estimate) 2014 (projected)1 Corporation Tax Corporation Tax2 Income Tax Income Tax3 Excise Service Tax4 Customs Customs5 Service Tax Excise6 STT STT7 Wealth Tax Wealth TaxObserve the rank of top two (Corpo, IT) and bottom two (STT, wealth) are same for each year.only difference is in the rank 3-4-5 because Chindu hopes Service tax will bring highestcollection among all indirect taxes in the year 2014-15. (will it? well, that remains to be seen!)From exam point of view,At the moment, Tax Ranking of 2013 is more important. (Because it is near to reality based on actual data gathered from April 2013 to almost upto Feb 2014. this ranking isunlikely to change.)While tax ranking of 2014 is just projected revenue from interim budget. Itll change whennew government makes new (full) budget (=tax rates changed= collection ranking will bechanged).Then youll have to mugup the new updated ranking accordingly. (well see when fullbudget comes after election). Gross vs net Tax revenueBefore going into gross vs net, lets take two quick bites:#1: Tax sharing80th amendment 2000: 29% of total taxes of the Union need to be shared with states13th FC (Kelkar)= Union to share 32% with states.14th FC (YV Reddy): yet to give recommendation.#2: NCCFNational Calamity Contingency Fund (NCCF)Under Home ministryPart of Public account (hence parliament approval not necessary.)Now coming to the main point:Gross Tax revenueIt includes1. Total direct taxes of union (we already saw)2. Total indirect taxes of union (we already saw)3. +Union territories without legislature (Diu, Daman etc.)=> their direct & indirect taxesare also counted here.Net Tax revenueThis equals, Gross tax revenue MINUS [revenue shared with states + money sent to Nationalcalamity contingency fund]Lets observe the data (numbers not important.)crores RE 2013 BE 2014A.(Gross) Tax Revenue [=direct + indirect + UT w/o legislature] 1158906 1379199B.MINUS tax revenue shared with States/UT 318230 387732C.MINUS money transferred to calamity fund (NCCF) 4650 5050NET Tax revenue=A-(B+C) 836026 986417Ok, but why do we need to find Net tax revenue?Because, from gross tax revenue, union has to give some money to States/UT and calamityfund=> remaining money is the actual money left in the hands of Union government (that theycan spend as per their own wishes).Lets try a very cheap MCQWhich of the following statements is/are correcta. In union budget, gross tax revenue is always lower than net tax revenueb. In the union budget, net tax revenue is calculated as the sum of [Gross tax revenue + taxesshared by States + money unspent in calamity fund]c. Both A and Bd. Neither A nor BApproach: When in doubt about gross vs. net, just count the number of alphabets in theirspelling. Gross (5) and Net (3). So any formula that seems to go the other way = wrong. (e.g.observe statement B, if it were true, then NET would be higher than GROSS. Because everyhingis ++) hence, B is definitely wrong. Same way, statement A is wrong because 5 > 3.Side note:Net GDP = Gross GDP MINUS depreciation.Here also, Net (3 letters) is lower than Gross (5 letters).So far,REVENUE PART CAPITAL PARTReceipt Expenditure Receipt ExpenditureTax Non Tax1. Direct taxes(DONE)2. Indirect Tax (DONE)Remaining columns and topics, in next articles, one by one.Appendixsome allied topics thatd have broken the flow of the article, hence putting @bottom appendix.#1: Direct taxes can be levied on Expenditure alsoObserve the case of Service tax vs FBT:SERVICE TAX FBTservice sector= self-explanatory- doctor, spa,hotel etc.Fringe benefit=when boss gives somefacility to worker, Apart from his usualsalary.Salman himself joins a posh Gymnasium,Annual fees Rs.1 lakh (+12% service tax)Salman buys membership to a posh gym, forhis bodyguard Shera. = 1 Lakh + 12%service tax + 30% FBT on.paid 1,12,000 to Gym Owner. Gym owner paysPay Rs. 1,12,000 to Gym owner (fees+ service tax)12k to government as service tax. Pay Rs. 30000 to government (FBT)Hence its called indirect tax, becauseSalman paid the tax but government did nottook it from his hand. But from that Gymowner.Called direct tax, because Salman directlyhad to pay FBT to government (and not to theGym owner, not to bodyguard Shera.)this is a tax on expenditure (on services)this is also a tax on expenditure (on fringebenefits)still levied as of 2014 discontinued from 2009lets try a very cheap MCQ:1. A Direct tax can be levied only on the income OR property of a person2. Fringe Benefit tax is an example of Indirect tax.3. Both A & B4. Neither A nor B#2: Canons of taxation: why some taxes get abolished?Mind the spelling: canon (rules/principles) and not cannon (used for bombing).Adam Smith gave four canons of good taxation system.1. Canon of Equality: taxes should be Proportionate to income.2. Canon of Certainty: about deadline and rates.3. Canon of Convenience: to the tax payer.4. Canon of Economy: tax collection cost should be minimum. (i.e. staff salary, Database Management)+ Misc. principles: transparency, simplicity, elasticity (to economic fluctuation) etc.ya but where is it relevant? Recall that government abolished certain direct taxes (estate duty,gift tax etc.) in past. Why? Because, they were not following some of these canons. for exampleGift tax (abolished)Most people managed to evade. Hence Gift tax used to fetch barely ~10 crores in revenue. Thus,fourth canon missed. (Collection cost very high- staff salary and database Management.)Finally, in the late 90s, government dropped this tax. Although it doesnt mean there is no tax onexpensive gifts- theyre counted under Taxable income (of the person who receives the gift)Estate duty (abolished)Estate duty was charged during the inheritance of estate. (although this was a Union tax-entirely cash was given to states.)Problem: most people evaded, Estate duty Barely fetched ~15 crores = Again 4th canonmissed.Hotel Receipt Tax (abolished)In the late 80s, we did not have service tax. But government imposed tax if you spentmoney on luxury hotels. (direct tax- because you had to pay this tax to government and notvia hotel owner)problem: same as above. barely fetched a few crores.Banking cash transaction tax (Abolished)introduced in 2005:0.1% on cash withdrawals of more than Rs 50,000 (individuals) and Rs 1 lakh for others ina single day from non-savings bank account.Why? to track unaccounted money and trace its source and destination.Abolished in 2009, when Chindu felt he had fetched enough information.Although indirectly the canons were also responsible: #1, #3 and #4.Fringe Benefit tax (Abolished)2005 Chindu started FBT2009 Pranab abolished FBTCompliance cost was very high (Because company would need to keep record and acountof every little fringe benefit they gave to employees)in other words, inconvenience to tax payer (company)=> it was even called nuisance tax.Therefore, 3rd canon missed.Besides, revenue collection was ~8k crore. and company would pay less salary toemployees in pretext of giving those fringe benefits= employees pay less income tax. soindirectly, government was axing its own leg. (Recall our MCQ tables: income tax is thesecond largest source of revenue for union government!)Mock QuestionsAfter the article series is complete.Visit Mrunal.org/Economy For more on Money, Banking, Finance, Budget, Taxation andEconomy.URL to article: http://mrunal.org/2014/02/budget-interim-budget-2014-part-1of4-revenue-reciepts-direct-taxes-indirect-taxes-gross-vs-net-taxes-shortfalls-collection.htmlPosted By Mrunal On 19/02/2014 @ 10:19 In the category Economy